Telefonica Said to Weigh Debt-Cut Moves With U.K. Deal at Riskby and
British IPO, finding another buyer for O2 said to be discussed
Shareholders could face dividend reductions by Spanish carrier
Telefonica SA, facing opposition from European Union officials to the planned sale of its British mobile-phone business to competitor CK Hutchison Holdings Ltd., is formulating a Plan B to help preserve its credit rating.
The Spanish carrier has been counting on the 10.3 billion pound ($14.6 billion) sale of the O2 unit to reduce 49.9 billion euros ($56.5 billion) in debt. With the deal in danger of being blocked, executives at Telefonica are discussing alternatives, according to people with knowledge of the situation.
Those include restarting the sales process for O2, potentially to an industry player like Liberty Global PLC or private-equity buyers, said the people, who asked not to be named because the discussions are private. Other options include a spinoff of a publicly traded O2, they said. To buy time, and mitigate the damage from a failed transaction, Telefonica is also moving forward with plans to spin off the Telxius wireless-towers group created in February. An IPO of Telxius might bring $4 billion, far less than an O2 sale.
Selling O2 “was the best option for Telefonica because it is the cleanest, fastest -- you sell everything and for cash, and you can fix the debt problem quickly," said Javier Borrachero, head analyst for telecommunications at Kepler Cheuvreux. While Telefonica has alternatives, “investors would face uncertainty again for some time.”
At stake, potentially, is Telefonica’s dividend. The company has pledged to pay 75 cents a share this year, as long as the O2 sale goes through. This month, the board approved a first installment of 40 cents, to be paid in May. Telefonica has the second highest indicated dividend yield among 21 telecommunications companies in the Stoxx 600 index, according to Bloomberg data.
A Telefonica press officer declined to comment. The company has said in recent months that it is fully funded for the year. Telefonica has also said that part of the 2016 dividend could be paid in scrip if it fails to complete the O2 sale.
The carrier is rated two notches above junk by both Moody’s Investors Service and Standard & Poor’s. Even as debt ballooned in recent years, former chairman Cesar Alierta, who stepped down this month, sought to maintain dividend payments. Jose Maria Alvarez-Pallete, the former operating chief who replaced Alierta at the helm, has been less vocal.
With a May 19 deadline coming up, Li Ka-Shing’s Hutchison could make a last-ditch offer to save the deal. The planned sale has failed to win over E.U. antitrust regulators, who are poised to formally block it, people familiar with the matter said this week.
Within Telefonica, there are advocates for keeping the O2 business, because it has been performing better and gives the company a foothold in the U.K., according to the people.
O2 has one of the lowest churn rates in Europe at 1 percent and posted a 5 percent revenue increase in 2015, according to a company official, who asked not to be named. Adjusted operating income before depreciation and amortization, a measure of cash flow, grew 2.2 percent, accounting for 24.6 percent of sales.
Virgin Media owner Liberty Global may take a look at O2 should it come on the market, said a person familiar with the matter. A Liberty Global representative couldn’t immediately be reached for comment.
Telefonica has been looking at options for its U.K. operations for years, as other European markets consolidated to three major wireless carriers from four. The company sought to broker a deal with BT Group PLC last year, only to have the former British monopoly buy EE Ltd. instead. The Spanish carrier had also considered listing the unit, as it did in Germany with Telefonica Deutschland Holding AG.
If Telefonica were to keep the U.K. business, it wouldn’t have to raise quite as much from other disposals because earnings generated by the British unit will help it service its debt, said Carlos Winzer, an analyst at Moody’s.